Definition

Safety stock is a buffer stock that businesses keep on hand to ensure that they have enough inventory to meet customer demand and avoid stockouts, which can negatively impact sales and customer satisfaction. The safety stock level is determined by considering factors such as lead time, demand variability, and service level.

Formula

Safety Stock = (Maximum daily usage x Maximum lead time) – (Average daily usage x Average lead time)

Example

Let’s say that a business sells 100 units of a particular product each day, and the lead time for restocking that product is 5 days. The business wants to maintain a service level of 95%, which means that they want to have enough inventory on hand to meet customer demand 95% of the time. Using historical data, the business determines that the standard deviation of daily demand for the product is 20 units.

Using this information, we can calculate the safety stock as follows:

Maximum daily usage = 100 units Maximum lead time = 5 days Average daily usage = 100 units Average lead time = 5 days Standard deviation = 20 units

Safety Stock = (100 x 5) – (100 x 5 – (1.65 x 20 x √5)) Safety Stock = 500 – 21.45 Safety Stock = 478.55

Therefore, the business should maintain a safety stock of approximately 478 units to achieve a service level of 95%.

It’s important to note that the optimal level of safety stock varies depending on the industry, product, and service level desired. Our calculator uses a Z-score for desired service level, which can be customized to fit your business needs.

In conclusion, safety stock is an essential concept for any business that wants to minimize the risk of stockouts and maintain customer satisfaction. By using our safety stock calculator, you can determine the optimal level of safety stock for your business and improve your supply chain management.

Need to find Z-score: Value visit here Z-Score Table